Government Budget (Woes)

It's been a few weeks since I wrote a blog entry. Once again, the reasons can mostly be attributed to a laziness impacted by work and schoolwork. Doesn't make much sense...but that's my story and I am sticking to it.

Anyway, I wanted to take this time to write about the current debates involving the national budget for the current fiscal year as well as for the future. Last week's potential government shutdown was avoided by the passing of a spending bill that seemed to satisfy the Republicans' demands for spending cuts -- approximately $40 billion for the rest of the fiscal year. This seems like a staggering amount but, on closer look, the cuts are probably less than $350 million. The reason you may ask? Most of the cuts from the budget are for non-existing programs, aka programs that are supposed to be instated in the future but now never will. But of course, most people do not understand this concept and thus only see the $40 billion number.

A couple of hours ago, it was announced that the U.S. House of Representatives (currently with a Republican majority) that seeks to $4.4 trillion from the budget for the next decade. Democrats are obviously in uproar over the fact that most cuts will come from social programs like Medicare and Medicaid. Republicans are probably grinning to themselves as they just cast a lighted bomb into the President's court. President Obama has only two choices: (1) defuse the bomb through his veto power, or (2) try to work a compromise with the Republicans. This logic is assuming the implausible scenario that the budget gets approved by the U.S. Senate.

I just wanted to express a few thoughts on two topics -- the first is about how these spending cuts are quantified, a very deceptive process. The second is about the nature of government and its role in society. As someone much influenced by neoclassical economics, I believe in a smaller government and allowing the people to determine their own lives.

First about how spending is quantified:

• As in all cases, the figure thrown out seems fantastic: $4.4 trillion compares to the annual $14 trillion of U.S. GDP. However, this figure is always an accumulated figure over a period of time. In this case, the time horizon is 10 years, which means that we are looking about an average of $440 billion per year. Now this still a very high figure but...
• ...this figure is the best-case-scenario, which means $440 billion is the most one can expect to cut from the spending. The real cuts will be significantly less. Furthermore, the time horizon of 10 years masks the fact that spending cuts is an exponential function if graphed: most cuts will occur at the end of the 10-year period, rather than the beginning. This brings up another important point...
• ...the fiscal budget for the federal government must be passed from year-to-year. This means that each administration and Congress can propose new budgets for the next year, and so forth. What are the odds the future governments will stick with this current budget? Answer is: zero, nada, not even if Republicans held both the executive and legislative branches for the next 10 years.
• In sum, the real spending cuts are very much insignificant given the above points. I'd be surprised if even $50 billion is cut from next year's budget (out of the supposed $440 billion proposed cuts).

Now about the role of government in society and how this relates to the budget:

• It doesn't take a rocket scientist to see where the bulk of the cuts is coming from: social safety programs like Medicare, Medicaid, and Social Security to a lesser extent (I haven't seen the details so the last one is largely an assumption). Democrats are in uproar as well as senior citizens, since either their party platform or their livelihood is being targeted. After all, it was FDR, one of the greatest Democratic leaders, who lay the foundation for these programs.
• Democrats are also in uproar over the budget's proposal to streamline the current tax code and reduce taxes across the board. They (of course) push for the elimination of tax breaks for the wealthy. The general populace agree with them, as American corporations are making record profits and the annual list of millionaires/billionaires keeps growing.
• My opinion over the role of government is biased as a I studied economics back in college, and heavily influenced by libertarian ideas as in the writings of Milton Friedman. But I do think that social programs are not the best means to help the needy -- something I supported with a 100-page senior thesis. Social programs serve the good-intention of providing a safety net for individuals, but its mandatory nature is wrong and reduces in prodigious waste. In addition, they create a very negative disincentive for individuals to work and strive for better livelihoods. If it was a clear cut between social programs or no social programs, then I'd argue for the latter.
• But it is political suicide for any politician to push for a complete elimination of social programs, once they have been introduced. The only recourse is to reduce their scope and their impact on the country's finances -- which is actually the optimal (Pareto efficient) solution. In other words, we should have only a few social programs that are truly beneficial.
• For example, I do not understand the difference between Medicare and Medicaid (okay, I do but it seems redundant). I am all for helping out the poor and underprivileged, but creating a wholly different system to cater to their needs is not the answer. For one, it is not fair for the taxpayers who fund these systems; and for another, it creates a perverse incentive against "self-help".
• As someone who studied the negative income tax, I really believe it is the best means to resolve the social woes -- in addition to eliminating the requirement to contribute to social programs. Thus in an ideal world, I would see citizens as having the option to contribute or not to social programs (the latter of which means they would be excluded) and for government to pay out fixed income instead of an amalgam of different programs. Much like the tax code, if we create conditions, then the end-result would be many loops that people ultimately exploit.

I want to end by pointing out a monstrous thing about the budget: defense spending accounts for a good 1/3 of the government spending year-in and year-out. This is absolutely ridiculous!